The Trump administration has proposed a new regulation that would strip private schools and colleges of their tax-exempt status if they provide targeted assistance to students on the basis of race — a significant escalation in the White House's campaign to eliminate diversity programs directed at Black, Hispanic, and other minority students.

The Treasury Department put forward the change on Thursday. As a proposed regulation, it must go through the federal rulemaking process — including a public comment period and potential legal challenges from affected institutions — before it can be finalized. If finalized, the regulation would take effect after May 2027. The rule broadly targets any policy or program that benefits students because of their race, and it explicitly states that such benefits in admissions, scholarships, and facilities "would be incompatible" with the rule.

The move is the administration's latest effort to pressure schools and colleges into weeding out diversity, equity, and inclusion policies that had become widespread before President Donald Trump returned to the White House promising to end them. Trump officials have leaned on Civil Rights-era laws to unwind those policies, arguing that they discriminate against white and Asian American students. The effort to repurpose those laws — originally enacted to protect Black Americans from segregation-era discrimination — marks a broader shift in how federal civil rights enforcement is being applied to education.

Higher education leaders quickly criticized the proposal.

"The administration's latest rules changes are its most blatant attack to keep working class Americans and people of color from accessing higher education and a better life," Mike Gavin, president and CEO of the Alliance for Higher Education, said in a statement. "By claiming that efforts to increase fair opportunity for all students are discriminatory, the administration is trying to gaslight the American people into believing that up is down and black is white."

Under pressure from the White House, scores of universities have already shut down or rebranded their DEI offices and ended scholarships and clubs designed for minority students. In announcing the proposal, Treasury Secretary Scott Bessent signaled that even policies no longer carrying the DEI label could fall within its scope.

"Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature," Bessent said.

The Treasury Department and IRS estimate that as many as 18,000 private schools, colleges, and other educational institutions could be affected by the proposal.

America's private universities have been exempt from many taxes for more than a century on the grounds that they provide a public good — a benefit that saves many institutions millions of dollars every year. Losing that status would represent a major financial blow, since it would also end the tax deductibility of donations on which many institutions rely for scholarships, research, and operations. Trump has viewed tax-exempt status as a lever in his pressure campaign against colleges he describes as hotbeds of "wokeness." During his battle with Harvard University, the nation's oldest college, he threatened last year to revoke the benefit. Harvard officials responded at the time that there was no legal basis for such a move and argued it would force cuts to financial aid and crucial medical research.

It is exceedingly rare for the federal government to target a college's tax-exempt status, but there is one notable precedent. Bob Jones University, a small Christian school in South Carolina, lost the benefit in the 1970s over its ban on interracial dating and marriage on campus. The Supreme Court upheld the IRS's decision to deny the school its exemption in 1983, a ruling that affirmed the government's authority to condition tax benefits on compliance with public policy. The university later ended the ban and regained tax-exempt status in 2017.

Federal laws bar the IRS from targeting individuals and organizations for ideological reasons, and federal officials are prohibited from directing IRS investigations. To keep nonprofit status — which allows donations to be tax-deductible — organizations must comply with IRS rules on lobbying, political campaign activity, and annual reporting requirements, among other obligations.

The Trump administration frames the new proposal as a step toward restoring merit in the nation's education system.

Marjorie Hass, president of the Council of Independent Colleges, said the change would most likely affect donations, which are often earmarked for scholarships. Tim Powers, a vice president of the National Association of Independent Colleges and Universities, added that the uncertainty surrounding the proposal would create challenges for schools.

"Our institutions are committed to complying with applicable civil rights laws and maintaining safe and supportive campuses free from discrimination," Powers said. "However, the proposed rule may create new compliance burdens and legal uncertainties for institutions of higher education that are already operating in line with existing nondiscrimination rules."

Separately, the Justice Department has opened investigations into several medical schools it accuses of favoring Black and Hispanic students in admissions. Trump officials contend such favoritism violates Title IV of the Civil Rights Act of 1964, a federal law that forbids discrimination in education and was created to combat segregation and its effects.

A statement from IRS Chief Executive Officer Frank J. Bisignano said private schools that promote discriminatory practices will no longer be exempt from taxes.

"Today's proposed regulations put institutions on notice and schools that continue to engage in racial discrimination should expect to lose that status," he said.

The months ahead will determine whether the rule survives that process: institutions and advocacy groups can be expected to weigh in during the comment period, and litigation over the rule's scope and statutory authority is likely before the May 2027 effective date.

Source: Fortune